China Consumer

Full of beans

New local cafe chain seeks to challenge Starbucks

Tang-Wei-w

Tang: she likes a Luckin latte

Despite all the fanfare about the Chinese embracing lattes and skinny whites, most still don’t drink much coffee (if at all). A recent survey reveals the average consumption is only four cups of coffee a year, considerably less than their Western counterparts and lower than their neighbours – the Japanese drink 200 cups a year, while South Koreans average 140 cups.

And the way Yang Fei puts it, Starbucks is partially to blame for the slow uptake. “Starbucks has entered China for more than 10 years, but the majority of Chinese people still don’t drink coffee,” the chief marketing officer of Luckin Coffee told Huxiu, a portal. “The reason is that most of the people don’t live near a Starbucks outlet. Furthermore, its coffee is prohibitively expensive. With the average check size around Rmb30 ($4.73) and Rmb40, that is way too pricey as an everyday purchase for most people.”

To change that, Luckin Coffee was founded last November and it thinks it has created a business model that could topple Starbucks’ ambitions in the country. In less than a year, the local coffee chain has opened 300 stores nationwide – a figure that already exceeds the number of outlets UK rival Costa has in the country.

Its business model is simple: customers can place an order using its mobile app (where they can customise their drink – more milk, for example). After the order has been placed, the nearest barista goes to work and the end product is usually delivered to the customer’s desk or home within 30 minutes through a partnership with SF Express, one of the biggest logistics firms in China.

Luckin’s goal, as its tagline suggests, is “to let you quickly enjoy a cup of good and inexpensive coffee”.

Its cheapest coffee is an Americano, which costs Rmb21, while the most expensive is a Vanilla or Caramel Latte that retails for Rmb27. Even with a small snack like a chicken wrap, the company tries to keep the average bill to no more than Rmb30.

What about the product quality? One reporter at iFanr, a tech portal, concludes, “I have tasted all four types of sugar-less coffee drink. In general, its coffee is very close to Starbucks’ in terms of taste. From the way it blends the coffee beans (Luckin sources Arabica beans just like Starbucks) it’s clear that it is aiming squarely at the US coffee-giant.”

How it manages to keep its costs down is by saving on rent and labour. Most Luckin outlets are located within office buildings in large cities. To keep overheads lower, it offers minimal seating, promoting a grab-and-go experience instead. And since the majority of ordering and payment are done online, it can do without cashiers and other service-related staff.

“Focusing only on takeaway has taken coffee outside of the coffee shops, expanding to where coffee is generally consumed,” Zhang Xiaogao, chief executive of Coffee Box, another local coffee chain, told Huxiu. “This development could be important, because it establishes coffee as a necessity and changes the old perception that coffee is for socialising.”

Luckin has tapped actress Tang Wei and actor Zhang Zhen to endorse the brand. To entice new customers, it has also launched a series of promotions. For instance, the first drink is free upon signing up for its app. If a customer refers a friend, both get a free drink. The company says it plans to give away Rmb1 billion worth of free drinks to establish brand loyalty.

“While this sort of referral marketing tactic seems very old fashioned, using their own customers to attract new ones is far more cost-effective,” says Jiemian, a portal.

To support the rapid expansion, the start-up told Huxiu that it will initiate a fundraising round later this month. Its goal is to bring the number of stores to 500 nationwide by the end of May.

Starbucks is putting up a fight. The US giant also works with Chinese delivery services and it has announced plans to add more than 500 stores a year in China. Moreover, it is already working with Tencent’s WeChat on mobile payments (the app accounted for over 30% of its transactions last year).

Users can also buy a Starbucks virtual gift voucher or a cup of coffee for a friend through WeChat.


© ChinTell Ltd. All rights reserved.

Exclusively sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.